12.18.2006

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Updates

On December 7, 2006, the U.S. Supreme Court granted certiorari in Leegin Creative Leather Products v. PSKS, Inc., a potential landmark case challenging the long-standing "Dr. Miles" doctrine condemning resale price maintenance and minimum vertical price fixing as per se violations of Section One of the Sherman Act.

Historical Background of the per se Rule Against Resale Price Maintenance and Vertical Price Fixing

The rule of per se illegality for resale price maintenance was announced by the Supreme Court in 1911 in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911). Dr. Miles held that resale price maintenance agreements—agreements in which a manufacturer and retailer agree on the exact or minimum price at which a retailer may sell its product—constitute a per se violation of the Sherman Act. A per se rule bars manufacturers from defending the practice on grounds that it is procompetitive in a particular case.

At one time, the per se rule applied not only to minimum resale price fixing, but also to most vertical non-price restraints between seller and buyer (e.g., exclusive dealing and territorial exclusivity). See United States v. Arnold, Schwinn & Co., 388 U.S. 365, 380 (1967). Over the years, however, the Supreme Court abandoned the per se standard for non-price resale restraints in favor of the "rule of reason," under which the procompetitive effects of a restraint are weighed against their anticompetitive effects. Cont’l T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 58-59 (1977). Most recently, the Supreme Court abandoned the per se rule against maximum resale price fixing (agreements setting the highest price at which a product may be resold). See State Oil Co. v. Khan, 522 U.S. 3 (1997). The core prohibition against minimum resale price fixing has remained intact, however.

As the Court has whittled away at the per se rule, scholars and economists have argued that Dr. Miles is inconsistent with modern antitrust jurisprudence and should be abandoned. The Antitrust Section of the American Bar Association has agreed and Leegin’s challenge to Dr. Miles is no surprise.

Leegin Challenges Application of the Per Se Rule

Leegin is a privately owned manufacturer of women’s leather goods that targets high end fashion boutiques. In an effort to maintain the exclusive appeal of its "Brighton" product line and to promote increased sales and marketing efforts, Leegin attempted to implement a "Colgate" policy, named for United States v. Colgate & Co., 250 U.S. 300 (1919). Colgate held that there is no "agreement" prohibited by Section One of the Sherman Act if manufacturers announce a unilateral policy of terminating price cutting distributors. Colgate policies are notoriously difficult to implement, however, and juries may find the requisite "agreement" in virtually any form of coercive activity that goes beyond "announce and terminate."

In this case, Leegin announced a "Heart Store Program" that provided retailers incentives to create separate sections of their stores dedicated to the Brighton brand. In implementing the program, Leegin required that retailers pledge to "[f]ollow the Brighton Suggested Pricing Policy at all times." In 2002, Leegin suspended shipments to PSKS after learning that PSKS had discounted Brighton products in violation of Leegin’s Colgate policy. PSKS responded by filing suit. At trial, the jury found that Leegin's policy constituted a resale price maintenance agreement and awarded $3.6 million in damages (before statutory trebling) to PSKS. On appeal, the Fifth Circuit affirmed the award. Leegin then sought Supreme Court review on the sole question of whether minimum resale price maintenance agreements should be deemed illegal per se or instead evaluated under the rule of reason, permitting consideration of the parties' market share and the actual economic effects of the agreement.

Practical Implications of a Reversal of Dr. Miles

The Supreme Court’s decision in Leegin could have a significant practical effect on the way manufacturers establish and implement resale pricing policies. Sellers currently rely on a variety of tools to influence retail pricing, including suggested retail pricing strategies, agency relationships, co-op advertising programs and Colgate policies. None of these options is wholly satisfactory, however. As evidenced by the jury verdict in Leegin, the process of implementing and enforcing a legally valid policy can be difficult and uncertain.

If the Supreme Court reverses Dr. Miles and applies the rule of reason to such agreements, manufacturers would have substantially greater flexibility in crafting programs aimed at better enabling them to compete in interbrand competition. For example, manufacturers could adopt minimum resale price maintenance policies to encourage resellers to promote product without fear of “free riding” by rival cost-cutting dealers that spend little on promotional activities or service. Even so, substantial uncertainty would remain, particularly for those companies with substantial market power. The rule of reason is not a rule of per se legality and of course application of state antitrust laws provides even further uncertainty. We hope that the Court will take this opportunity to provide further guidance on how to apply the rule of reason in this context, rather than leaving the issue solely to continued debate among economists and antitrust practitioners—or to the even more painful process of case-by-case judicial evaluation.

Additional Information

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